Shadow lending by listed Chinese banks surged in the first half, underlining the challenges faced by the country’s banking regulator as it tries to rein in the use of opaque lending structures that are seen as a threat to financial stability.
China’s lenders, led by the mid-tier banks, have been increasing their use of shadow lending products for years, as they can offer higher returns and tie up less of a bank’s capital than traditional lending, Reuters reported.
But they also disguise the quality of a bank’s balance sheet, and sector-wide make it harder for regulators to assess systemic risk and the volume of lending in the economy.
A Reuters analysis of bank filings shows Shanghai Pudong Development Bank, a leading joint-stock lender, increased its receivables for trust schemes and asset management plans, or so-called shadow loans, by 14% in the first six months of the year to 1.27 trillion yuan ($190 billion), giving it China’s biggest portfolio of such products.
The shadow loan book at China’s largest joint-stock lender, Industrial Bank, rose 4.4% to 1.23 trillion yuan, equivalent to 63% of its normal loan book, according to Reuters calculations.
China Minsheng Banking, China Zheshang Bank, Shengjing Bank, Bank of Jinzhou, and Bank of Chongqing also substantially increased their portfolios by 9% or more.
Minsheng and Zheshang both reported an 86% rise, the fastest among their listed peers, according to Reuters calculations.
“I’m actually a bit surprised that some smaller banks were still growing those positions,” said Wei Hou, AB Bernstein banking analyst. Given the regulatory push, the trend ought to be going the other way, he added.
The China Banking Regulatory Commission didn’t immediately respond to a request for comment.
The CBRC has tried to address the rampant growth of these shadow lending products, particularly at mid-sized banks.
In April it issued Document 82 to lenders, which most bankers and analysts interpreted as an attempt to compel banks to increase provisioning on shadow loans and bring them in line with normal loans.
Some analysts at the time said the move could force banks to seek fresh capital to shore up their balance sheets, a prospect that has become more likely as banks’ capital positions deteriorated during the first half.
Shadow loans had already reached 12.6 trillion yuan at the end of last year, according to calculations by UBS, about a fifth of China’s entire annual economic output.
And credit rating agency Fitch said in July that around a third of system credit resides outside bank loan books, undermining asset quality data.
